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We consider a stochastic local volatility model with domestic and foreign stochastic interest rates and identify a bias with respect to the deterministic local volatility with deterministic rates. Relating the local volatility of our model to that of the forward price, we quantify that bias by...
Persistent link: https://www.econbiz.de/10014202468
Financial time series exhibit multifractal scaling behaviour indicating a complex behaviour with long-range time correlations manifested on different intrinsic time scales. Such a behaviour typically points to the presence of recurrent economic cycles, crises, large fluctuations, and other...
Persistent link: https://www.econbiz.de/10013001409
Parametric volatility models can be seen as the result of some form of dimensionality reduction obtained by projecting the volatility surface into a basis of risk factors. Examples include polynomial models and stochastic volatility models having an explicit expression for the smile, such as the...
Persistent link: https://www.econbiz.de/10013221719
The only thing one can say about financial markets is that parsimonious information on option prices is available in time and space, and that we can only use the No-Dominance law (or stronger version of No-Arbitrage) to account for it. Thus, one requires a consistent model to assess relative...
Persistent link: https://www.econbiz.de/10013101023
We describe a single parametric model for the entire volatility surface with interpolation and extrapolation technique generating a smooth and robust implied volatility surface without arbitrage in space and time. It is used for marking option prices on indices and single stocks as well as for...
Persistent link: https://www.econbiz.de/10013104611
We consider a stochastic local volatility model with domestic and foreign stochastic interest rates such that the volatility decomposes into a deterministic local volatility plus some bias terms. Assuming a collapse process for the variance with the same random variable for all time and...
Persistent link: https://www.econbiz.de/10013148809
The implied volatility surface being a mapping from Black-Scholes prices, necessary and sufficient conditions for the surface to be free from static arbitrage must be defined in terms of the properties and limits of the Black-Scholes formula. Acknowledging this argument, we develop a parametric...
Persistent link: https://www.econbiz.de/10013088947
The study considers a stochastic local volatility model with domestic and foreign stochastic interest rates and identifies a bias with respect to the deterministic local volatility with deterministic rates. Relating the local volatility of the model to that of the forward price, the study...
Persistent link: https://www.econbiz.de/10013130293
We propose to model the dynamics of the entire implied volatility surface (IVS) multi-step ahead by letting the parameters of a stochastic volatility model with an explicit expression for the smile be dynamically evolved. We assume that these model parameters are stochastic processes driven by...
Persistent link: https://www.econbiz.de/10013321640
When pricing options, correctly modelling the dynamics of the underlying stock process, by accounting for all market specificities, is a challenge. In the case of daily price limits, the difficulties arise due to the market boundary conditions restricting the dynamics of stock prices within a...
Persistent link: https://www.econbiz.de/10014254126